CH. 14 Quiz

The debt to total assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

True

The replacement of an existing bond issue with a new one is called refunding.

True

The stated rate is the same as the coupon rate.

True

A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $600,000. To extinguish this debt, the company had to pay a call premium of $200,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes? A) Charge $800,000 to a loss in the year of extinguishment. B) Either amortize $800,000 over four years or charge $800,000 to a loss immediately, whichever management selects. C) Charge $200,000 to a loss in the year of extinguishment and amortize $600,000 over four years. D) Amortize $800,000 over four years.

Charge $800,000 to a loss in the year of extinguishment. $600,000 + $200,000 = $800,000

On July 1, 2012, Spear Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2012 and mature on April 1, 2022. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance? A) $965,000 B) $3,000,000 C) $2,970,000 D) $3,045,000

$3,045,000 ($3,000,000 × .99) + ($3,000,000 × .10 × 3/12) = $3,045,000

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for A) 10 periods and 10% from the present value of 1 table. B) 10 periods and 8% from the present value of 1 table. C) 20 periods and 4% from the present value of 1 table. D) 20 periods and 5% from the present value of 1 table.

20 periods and 4% from the present value of 1 table.

Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

False

If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

False

The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

False

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. Another step in calculating the issue price of the bonds is to A) multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table. B) multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table. C) multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table. D) None of these.

None of these.

Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue.

True

If the market rate is greater than the coupon rate, bonds will be sold at a premium.

True

Bonds for which the owners' names are not registered with the issuing corporation are called A) bearer bonds. B) term bonds. C) debenture bonds. D) secured bonds.

bearer bonds.

The term used for bonds that are unsecured as to principal is

debenture bonds.

The rate of interest actually earned by bondholders is called the A) effective, yield, or market rate. B) effective rate. C) stated rate. D) yield rate.

effective, yield, or market rate.

Bonds that pay no interest unless the issuing company is profitable are called A) debenture bonds. B) collateral trust bonds. C) revenue bonds. D) income bonds.

income bonds.

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be A) increased by accrued interest from June 1 to November 1. B) decreased by accrued interest from June 1 to November 1. C) increased by accrued interest from May 1 to June 1. D) decreased by accrued interest from May 1 to June 1.

increased by accrued interest from May 1 to June 1.

On January 1, 2012, Ellison Co. issued eight-year bonds with a face value of $2,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .627 Present value of 1 for 8 periods at 8% .540 Present value of 1 for 16 periods at 3% .623 Present value of 1 for 16 periods at 4% .534 Present value of annuity for 8 periods at 6% 6.210 Present value of annuity for 8 periods at 8% 5.747 Present value of annuity for 16 periods at 3% 12.561 Present value of annuity for 16 periods at 4% 11.652 The issue price of the bonds is Entry field with correct answer A) $1,767,120. B) $1,779,120. C) $1,999,200. D) $1,769,640.

$1,767,120. $1,068,000 + $349,560 = $1,767,120

Everhart Company issues $15,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pays interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? fg 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 A) $15,651,924 B) $15,000,000 C) $15,649,482 D) $15,656,427

$15,656,427 ($15,000,000 × .78120) + ($450,000 × 8.75206) = $15,656,427

On January 1, 2012, Ann Price loaned $90,156 to Joe Kiger. A zero-interest-bearing note (face amount, $120,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2014. The prevailing rate of interest for a loan of this type is 10%. The present value of $120,000 at 10% for three years is $90,156. What amount of interest income should Ms. Price recognize in 2012? A) $12,000 B) $36,000 C) $27,048 D) $9,016

$9,016 $90,156 × .10 = $9,016

A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2013? A) $9,831,762 B) $9,970,312 C) $9,835,116 D) $9,816,916

$9,831,762 $9,802,072 + ($197,928 × 3/20) = $9,831,762

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? A) The amount of interest expense will remain constant over the 10-year period. B) The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability. C) The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period. D) The balance of mortgage payable will remain a constant amount over the 10-year period.

The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition A) any costs of issuing the bonds must be amortized up to the purchase date. B) the premium must be amortized up to the purchase date. C) interest must be accrued from the last interest date to the purchase date. D) any of these.

any of these.

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless A) no interest rate is stated. B) the stated interest rate is unreasonable. C) the stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note. D) any of these.

any of these.

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company A) is in violation of generally accepted accounting principles. B) is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. C) wishes to confine all information related to the debt to the income statement and the statement of cash flow. D) can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to A) the market rate multiplied by the beginning-of-period carrying amount of the bonds. B) the stated (nominal) rate of interest multiplied by the face value of the bonds. C) the market rate of interest multiplied by the face value of the bonds. D) the stated rate multiplied by the beginning-of-period carrying amount of the bonds.

the market rate multiplied by the beginning-of-period carrying amount of the bonds.

A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place A) the directors of both entities involved in the transaction should negotiate a value to be assigned to the property. B) the present value of the debt instrument must be approximated using an imputed interest rate. C) it should not be recorded on the books of either party until the fair value of the property becomes evident. D) the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction.

the present value of the debt instrument must be approximated using an imputed interest rate.